Zen Start-up Lessons: What Nest Labs Can Teach Entrepreneurs

by Christopher Meyer on 02/14/2014

Nest Labs makes a smarter, Internet- connected thermostat that sells for two to three times conventional models. Most recently, they’ve introduced a similarly empowered and priced smoke detector. You might ask if you need a smarter thermostat or smoke detector? You’ll have a chance to answer that for yourselves in a moment.

Nest was founded by former Apple leaders Tony Fadell and Matt Rodgers in 2010. On January 13, 2014, Google acquired Nest for $3.2 billion. To put this in perspective, that’s a valuation that easily surpasses Abercrombie and Fitch.

With twenty-twenty hindsight, Nest’s strategies are not stunning, nor are they easy to execute.

Target a huge, ignored market

Make a dumb commodity slightly smarter

Make it much prettier

Collect and mine usage data to benefit multiple stakeholders

Target a Huge, Ignored Market

Every home in the United States has at least one thermostat and smoke detector. Obviously this is a huge market but it’s also invisible. These are not sexy devices; they’re requirements that most of us ignore. Each performed its job; at least as it used to be defined.

The average price point in both markets is reasonably low and with little product differentiation – a commodity market. Commodity markets rarely attract entrepreneurial attention.

Nest demonstrates that there is potential for technology to reset commodity markets with small but meaningful changes in the value equation. Let’s see how they did that by returning to my opening question: do you really need a smart thermostat and smoke detector?

Make a dumb commodity slightly smarter

Functionally, the short answer may be no. One could argue that for all its intelligence, a thermostat is simply an on-off switch. That makes sense if regulating heat and cooling has no cost and the only purpose was to adjust room temperature to how we feel. Until rising energy costs became the norm, this was the devices’ job. You could also add growing concerns for global warming.

When energy costs rise, how you feel and when you should change the thermostat becomes more complex. Rising fuel costs make heating or cooling your home when you’re not there costly and ecologically wasteful. Many thermostats enable scheduling but our lives and schedules often diverge.

Nest added a motion detector to the thermostat. They can tell when you’re gone for a couple of hours and save more energy than fixed schedules.

A motion detector is not breakthrough technology. It’s just slightly smarter.

Similarly, connecting the thermostat through Wi-Fi isn’t terribly complicated. Having an app on your phone that can adjust your thermostat might be slightly smarter or just silly. It’s smarter when you can turn it on or off before you return or after you leave. How many times have you left on a one-week trip and forgot to turn down the thermostat? For ecologically minded couch potatoes, you don’t have to get up during the Superbowl to adjust your thermostat. Beat that!

Wi-Fi enables a few more smarts. Wi-Fi also connects the Nest to weather forecasting services so that it can adjust inside temperatures in anticipation of outside changes. With data flowing from every installed Nest that’s online, analytics can find slight differences in usage patterns that maintain comfort by savimg energy bits at a time. And when linked to a Wi-Fi networked smoke detector, it could shut down your furnace if a fire or carbon monoxide sensor were triggered.

The key is that there’s no killer technology in Nest. It’s the thoughtful integration of readily available but heretofore unused technologies that makes it just smarter enough to matter.

Make it much prettier

Everything I said above is easy to explain but nearly impossible for a consumer to experience without using one. When the smart thermostat costs five times what a normal one does, that’s a sale where only tech-heads would venture. This is a classic new technology adoption issue.

But one thing we can experience and immediately, it is the look and feel. Apple taught us that smarter is accepted much faster when it’s also drop dead, gorgeous. Stunning design delivers immediate excitement whereas proving Nest’s energy saving claims takes months.

In the meantime, the elegant Nest begs you to get rid of that beige, ugly pimple of a thermostat. Just hold the picture at the top of the page next to your thermostat. You can replace yours with a glowing jewel that declares you and your wall have entered the prestigious realm of BMW and Bang and Olufsen.

Collect and mine usage data to benefit multiple stakeholders

Forward-thinking electrical utilities know that is far more costly to add capacity than it is to encourage conservation. Because Nest thermostats are connected to Nest servers through WiFi connection, Nest analytics can help utilities and customers cooperatively manage demand and cost during peak usage periods. Providing this information to utilities creates an additional revenue stream for Nest while saving customers money.

Still, how do you know you’re really saving energy? Nest emails you a monthly energy usage report that shows usage patterns and savings achieved. This creates customers awareness of the benefits the Nest product provides.

The infrastructure required to deliver these benefits is invisible to the Nest customers. At least that’s the case today. Surely Google was well aware of this as it provides a network of behavioral sensors inside our homes. How they will manage the privacy issues that will certainly accompany more expansive use of this data is to be determined.

Simple but not easy

Stories like Nest always seem obvious in retrospect. Nest’s four strategies are easy to describe; hard to do and even harder to learn.

These strategies are hard to learn because they come from experience. What is smarter or prettier is a mélange of style, functionality and finely honed instincts. It takes learning to discard a good answer when it’s not a great one.

These sensibilities are gained through repetition at the feet of Zen masters because more experience, by itself, is not the answer. One needs a guiding beacon that has walked, fallen off the path and rediscovered it. Losing and finding the path on your own can be done but it’s the slow road.

Earlier in his career, Fadel worked for Bill Atkinson, the software genius behind the Macintosh and founder of General Magic as well as fathering the iPod under Steve Jobs. When Fadel was asked what he would he advise a young entrepreneur, he suggested “work for your heroes.”

Why Working Wider?

Value creation has moved from the center of the firm to its edge and beyond. People are working and collaborating beyond home base to create value, including outside their firm. I call this phenomena "Working Wider". It dramatically changes the world of work, what defines leadership, how you compete and win.

We’re not just being challenged to think outside the box -- Now we’re working outside it as well.